FAQs

The definition of commercial real estate (CRE) is any property used for business purposes or to provide a workspace rather than a living space. Put simply, CRE is any property held to generate capital.

• Forgoing hiring a broker: Even with negotiation experience, or even an internal real estate team, CRE deals can be complicated and confusing. Brokers have the market knowledge, relationships and proven negotiating skills to find properties to meet a tenant’s specifications and negotiate a favorable lease on their behalf. Many tenants worry about the cost of commissions, but few understand this cost is generally paid for and levied by the landlord.

• Misunderstanding lease terms: Tenants that choose to negotiate CRE deals by themselves can struggle with understanding all the lease terms. An experienced broker, combined with the legal guidance of an attorney, can help tenants understand the often-complicated legal jargon and answer any questions associated with common CRE leases. Signing a lease that favors the landlord more than the tenant can come with costly, or disastrous, consequences.

• Focusing only on the price: Real estate is one of the largest expenses a business will face, so rent may be a major factor in choosing a CRE space. And while finding a property that suits the budget is important, it’s equally important to consider other factors, such as culture, growth, location, parking, transportation, availability of amenities, versatility of the space, infrastructure, proximity to competition, etc. Tenants that choose not to work with qualified brokers often pick unfavorable CRE properties based on the monthly rent alone.

• Overlooking future needs: Too many business owners focus their CRE needs on current needs without considering future growth, flexibility or financial decline. For example, business owners anticipating rapid growth can benefit from a right of first refusal clause, ramp-ins and/or other creative growth functions. These clauses ensure the tenant can grow or claim any additional space in the property as, and if, it becomes available. Conversely, sublet, assignment or early termination clauses provide the option to leave a space before the lease term is completed and also provide proper assumption if there are potential acquisitions/dispositions in a company’s future.

• Procrastinating: Tenants are prone to underestimate how long it can take to find space. Searching for properties, securing financing, negotiating lease terms, designing and conducting tenant improvements are time consuming. Tenants should give themselves at least 6–12 months to find and move into a new space. Procrastinating can leave tenants stuck in their current building for a time or in another, less-than-ideal space.

Title insurance protects the buyer from financial loss and related legal expenses in the event there is a defect in the title of a property, provided it is covered by the policy. Title insurance is about risk prevention, rather than risk assumption. Title examiners review the history of the property and seek to eliminate title issues before the purchase occurs. Title insurance has no monthly premium, it is simply a one-time payment at closing. Depending on the deed that is accepted (Special or General Warranty Deed), your title insurance will cover different scopes of liability.    

Commercial real estate is taxed in several ways:

• Property taxes: County and city governments levy property taxes on commercial property. Owners of commercial properties are required to pay this tax. If leasing, review my Three Types of Commercial Real Estate Leases blog to determine which leases include property taxes as part of the monthly payment, and which exclude these expenses.
• Federal income taxes:  Owners must pay federal taxes based on the profits generated from leasing commercial property. Taxes owed are based on profits, rather than the gross income—meaning expenses can be deducted.
• State income taxes: Property owners are required to pay state income tax on commercial property revenue. Like federal taxes, landlords can deduct expenses and only pay tax on the net profit.
• Local taxes: Depending on the state, local income tax may be levied on any commercial real estate profit. Individual municipalities determine what local taxes are required.

You don’t need a broker to look at CRE. However, buying CRE can be very complex, even for insider pros. It’s not the same as buying a home—at all. There are three distinct advantages that come with working with a professional CRE broker.

• Market data and analyzation: Every property has different characteristics. Operating expenses, existing leases, upcoming capital expenditures and many other property overheads can affect viability and value. Working with a broker will increase your awareness and aptitude in deciding if a property is correct for you.
• Save time: Without a broker, the list of available properties and their favorability with respect to your business’s best market location can be overwhelming. Furthermore, some states, similar to Utah, are “non-disclosure” states where prior sales are not made public—only ownership and dates of transfer. Thus, the right broker should have access to recent comparable data to assist you with valuation. In addition to avoiding the heavy investment of time to find the property, brokers save time as the deal progresses in organizing inspections, negotiating and re-negotiating terms, completing paperwork and making offers. Simply put, brokers streamline the process of finding and securing office space.

• Expert who can negotiate: Negotiation is the name of the CRE game. And successful negotiation can be downright stressful. A CRE broker negotiates for a living and can provide a buffer between the sometimes-turbulent process and the client. Brokers are advocates for their clients and spot hidden charges or landlord profit centers.

The 1031 exchange derives its name from Section 1031 of the U.S. Internal Revenue Code. It allows investors to prevent paying capital gains taxes when selling an investment property by reinvesting the proceeds, within a certain time period, in a property or properties of like kind and of equal or greater value. There are certain stipulations regarding timing, debt and pricing that revolve around these exchanges. Make sure you are aware of such and set up your 1031 through a certified accommodator.    

Chris Falk is an experienced commercial real estate agent who specializes and provides professional direction on acquisitions, dispositions and leasing. Chris has represented and transacted with companies including Pluralsight, Hertz, BOEING, Weber State University, Intermountain Healthcare, Wells Fargo, Associated Foods, Purple Mattress and The Church of Jesus Christ of Latter-day Saints.   

The decision to own or lease commercial property is similar to, but not exactly like, deciding whether to purchase or rent a house. Owning a building can be a good financial strategy for many businesses, while others may benefit more from leasing their properties. There is no simple answer, as owning commercial real estate takes into consideration depreciation, commercial financing and a totally different set of tax complications. Read our Renting vs. Buying blog to learn more about the many nuanced factors when considering this important business decision.   

Properties are classified into three distinct categories according to their location and construction, as outlined by the Building Owners and Managers Association (BOMA), a U.S. and Canada-based professional organization for CRE professionals founded in 1907.

• Class A: These properties are the finest quality and are optimally located. They are built to the highest building standards and come equipped with first-class finishes and cutting-edge technology. Class A properties fetch the highest rent.
• Class B: These properties lack the premium finishes and locations that are commonplace with Class A properties. However, Class B properties are usually built with adequate finishes and can be the right middle ground between the more expensive Class A properties and the more industrial-oriented Class C buildings.
• Class C: These properties typically come with lower quality finishes than Class A and B spaces, and may be in less accessible locations, but they could be just right for tenants that need a lower rent in a specific area or don’t require curb appeal.

The time it takes to negotiate a CRE lease varies depending on the individual situation. For example, signing a three-year lease on a move-in ready space could take anywhere from one to ten days—depending on the monthly rent negotiations. Conversely, a 10-year lease on a space needing improvement could take as little as one month, or go as long as nine months. In addition to the individual space and its required updates, the complexity of the lease will impact the timeframe. More lengthy leases filled with legalese are reviewed by a lawyer before signing. In general, negotiation time ranges between one and nine months.    

CRE leases come in a variety of forms. It’s crucial to understand what building expenses are covered in a lease and what costs the tenant is responsible for paying in addition to the base rent. See our Three Types of Commercial Real Estate Leases blog post for detailed information about the three most common CRE leases (full-service, triple-net, modified gross) and which is the most beneficial for an individual situation.    

This is one of the most common questions in commercial real estate. In short, it’s important to assess the current situation and plan for future growth. Read our How Much Office Space Do You Really Need blog post for some insightful questions and common guidelines to help determine adequate office space.